Q&A: Bankers' bonuses

What is a bonus?

A sum paid on top of a salary, typically once a year, usually in cash but also in shares or other financial instruments such as bank bonds.

Why tax them?

Banks are on track to pay out huge bonuses on the back of unprecedented intervention by the taxpayer. It is difficult for politicians to justify big bonus cheques when so much taxpayer money is at stake.

Is it just bankers at bailed-out banks who face the tax?

No, the Treasury is concerned that all banks have benefited from taxpayer support, not just ones in which it holds its stakes. Foreign banks with big operations here whose employees currently pay UK tax could fall into the new system. The bonus pot being set aside by Goldman Sachs, for instance, is thought to have caused particular concern at the Treasury even though the Wall Street firm has not directly received UK taxpayer funds. Hedge funds, fund managers and other City employees might be exempt.

Hasn't the Treasury already tried to clamp down on bonuses at RBS?

It can veto the size of bonuses at the bank but admitted yesterday it could do nothing about guaranteed bonuses agreed with star bankers until the terms of the contacts had run their course.

How could the tax be avoided?

Until it is revealed exactly how it is constructed, it is not clear. But bankers are already talking about the possibility of taking their bonuses in shares, rather than cash, to avoid tax bills. Or bonuses could be renamed "retention packages" and paid in monthly instalments to avoid any tax on one-off annual payments. Bankers could also leave the UK or ensure they are not domiciled in the country for tax purposes.

How much tax will it raise?

Possibly about £1bn. Accountants reckon the tax is more about punishing bankers than replenishing the Treasury's depleted coffers.